What comes to mind when one thinks of Customer Segmentation? Right off the bat, one may think of Market Segmentation. But if so, what’s the difference between the two? Why does segmentation matter? And what are some of the examples of Customer Segmentation that every marketer needs to know?
Let’s dive into what Customer Segmentation is. It is achieved by dividing the customer base into smaller groups according to typical demographics, preferences, and traits. The purpose is to find the best way to market a product or service to each group by conducting thorough and specific research about every group respectively.
As a marketer, segmenting the customer base into sub-groups is a critical task. Finding out the differing needs of the varying sub-groups makes it easier to market the product or service successfully. Furthermore, when customers find the product or service relevant to their taste and requirement, they are influenced into buying it. Hence, the purpose of customer segmentation is to achieve a connection with the customer group.
What is the difference between Market Segmentation and Customer Segmentation?
Market Segmentation, as the name states, is segmenting the market into smaller sub-groups. Customer Segmentation is a part of market segmentation. Through customer segmentation, the customers, and not the market, are divided according to similar traits. These include Gender, Income, Lifestyle, and Consumer Spending.
We had moved from product-oriented markets back when Capitalism began to Consumer Oriented Markets in the Twenty-first Century. They say that customer knows best so, when we segment our customers, to better understand the sub-groups, we set an objective to find the best possible way to market the product or service to the customer. Create a sense of need, make them wonder: Hey! That’s exactly what I was looking for!
Through segmentation, customer subgroups are targeted individually, marketing campaigns and promotional events, even advertisements, are tailor-made for the sub-group to influence them.
When personalised, and therefore custom products are made according to varying customer preferences among the customer segments, customers tend to return to the company to make another purchase.
According to the figure above, 44% of the customers that experience personalised shopping with a company will become repeated buyers. At the same time, 39% will be likely to tell their family and friends. Therefore, personalisation’s impact on the company’s sales can not be achieved without really understanding those customers. And customers can only be learned about and properly communicated with through segmentation. Hence, personalisation depends on segmentation, and segmentation depends on collecting necessary data about the customer base.
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Additionally, once customers are segmented successfully, Marketers can configure the best channel to reach the said group. What’s the communication channel to be used? It could be anything ranging from e-mail, social media, or door-to-door sales.
The aim is to create a good relationship with the customers, modifying and altering the product, packaging, or services according to their preferences by understanding them better. Segmentation is also a great way to experiment with the prices of said goods and services, to know what the customers are willing to pay and what marketing campaign or other practices to carry out to influence them.
At the end of the day, the purpose of a Marketer is to sell something to a customer. The marketing team is a vital component of a company through which the product or service’s message is conveyed to the consumers. It is responsible for the sales of said products and services, and therefore segmenting the target consumers is vital to a marketer.
Segment consumers for more personalized marketing!
Customers can be segmented according to Demographic Features, Psychographic Features, Geographic Features, and Behavioral Features. For example, customers having similar demographic traits can be grouped according to their Age, Income Level, Gender, and Family Status. On the other hand, Psychographic attributes include Social Status, Lifestyle choices, Interests, and Beliefs. Furthermore, customers are segmented according to Geography, Geographical Location, Climate, and even Language. Lastly, customers segmented through Behavioral Tendencies include those with similar Consumption and Spending.
Customers are also segmented according to their lifetime value. Customer Lifetime Value, otherwise known as CLV, is defined as the total value that a customer offers to a company in terms of money. Therefore, marketers may segment customers according to their CLV. They would focus their marketing efforts on targeting customers with a higher CLV, which adds to the company, instead of a lower one.
Okay, but how is the data collected?
We now know how customers are segmented, but when we talk about the information needed to segment customers into these groups, we look at multiple ways to gather insights about consumer preferences and general knowledge about customers. This data is that a marketer requires to segment the customer base according to their demography, behavioural tendencies, geography, etc.
Such ways may include customer interviews, surveys, and focus groups. All these are ways of gathering qualitative and quantitative data regarding the customer base to segment them.
For example, if we want to find out what gender is using our product more, with the product in question being the shampoo, we can conduct surveys to determine how many male and female users we have for the product in question. Surveys are a method of gaining quantitative data. Once we have access to this data, we can segment customers according to this demographic trait.
Read further about a few more Examples of Segmentation.
If implemented correctly, segmentation through personalization can boost revenue up by 3-5%.Mckinsey Report
Marketers must know how and when to segment customers according to the four segmentations discussed earlier: Demographic, Psychographic, Geographic, and Behavioral. There are some techniques all Marketers must know when it comes to Customer Segmentation.
There is also Technical Segmentation, where the customers are segmented according to what technology they currently use or/and what technology they prefer to use. These give marketers a clearer idea of what channel to use to reach the customers through their marketing efforts.
Customer Segmentation Models are vital for a Marketer to know about are RFM Segmentation: The RFM Model and segmenting customers through Cluster Analysis. The CLV (Customer Lifetime Value) approach is preferred to be used by marketers. However, since customer needs and preferences are dynamically changing, Marketers can use these segmentation models to capture the fast-changing preferences better.
Firstly, to understand how to segment customers using cluster analysis, we must know what clusters are. Clusters are a group of things that have certain similarities. Cluster Analysis is a mathematical model. The purpose of using the model in segmentation is to group the customers that have similarities, spending patterns, for instance, together. So why should marketers use cluster analysis? Once customers are segmented according to their similarities, it is easier for marketers to market a product or service to them and offer personalisation. One common way of conducting this scientific segmentation is the K-means cluster analysis.
The results obtained from the k-means cluster analysis allow marketers to predict changes in customer preferences. Also, they offer personalisation and special deals to the respective sub-group according to their preferences. Using this advanced technique to segment is beneficial for Marketers as it uses an algorithm to accurately group customers together. As a result, there is more accuracy, therefore, fewer chances of error.
Another Consumer Segmentation Model to enhance customer marketing is the RFM Analysis, where R stands for Recency: how long has it been since the customer has ordered anything? F for frequency: how frequently has the customer ordered or interacted with the company within a certain period? M for Monetary: how much has the customer spent during a specific period?
This model is used to find the best way to communicate with a single cluster of customers according to their communication preferences. The purpose is to increase customer loyalty and ultimately CLV. And since marketers have extensive information about their existing customers, where they are from, their buying history, tastes, and preference, they can use this information to successfully offer the customers offers and promotions that they can’t deny!
What’s more, is that using RFM is simple and can be done without complicated software and scientific methods. Moreover, it is accurate because it uses specific scales to group the customers, so it is safe to say that it is precise and guarantees success. It is also easy to analyse the information that the marketers gather.
Using Technical Segmentation along with these advanced scientific models to segment customers in addition to the basic segmentations (Demographic Segmentation, Psychographic Segmentation, Geographic Segmentation, Behavioral Segmentation) is something every marketer needs to know!
Segmentify has helped many businesses increase their revenues within two weeks by using their personalization tools and incorporating customer segmentation in the process! Book a demo with Segmentify or access more information on Customer Segmentation on www.segmentify.com!